Sort of On Topic. Is there any issue over overpricing and overselling a home to a relative if it's an all cash deal?

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Submitted by flu on August 1, 2008 - 9:03am

So I have a really dumb question I thought I'd get an opinion on.

Suppose that there's a relative who's interested in buying a primary home. Let's suppose right now that your current home's value via estimates is the same as my original purchase price.

Would there be any legality issues if
1) You were to markup my home such that it's $499k more than market price such that a sales would yield me a $499k profit.
2) The relative purchases the home in ALL CASH $499k above market and there isn't any lender involved (IE private sale) (IE no appraiser,no lender,etc)

Is there any issue with someone overpricing a home and for someone to overspend on a home, assuming it's his/her own money?

If so, wouldn't you end up pocketing $499k tax free (assuming you're filing joint return), under the current primary home sales rule (assuming you lived there already for 4 years)?

Just curious.

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This looks a lot like a
Submitted by FormerSanDiegan on August 1, 2008 - 9:54am.

This looks a lot like a person trying to avoid estate tax. Hiding transfers of large sums in transactions is an old trick that rich folks try to use to transfer wealth while avoiding estate tax.

Transfers among relatives tend to draw scrutiny.

You also might want to look into the details of the Duke Cunningham case and see if his sale of overpriced house violated laws other than the obvious influence peddling charges.

P.S. - The relative would overpay by 5-6 K per year in property taxes.

If your relatives' money is
Submitted by Arty on August 1, 2008 - 9:53am.

If your relatives' money is clean i.e. all taxes are paid and are from unquestionable source. You should be fine. If not, you will probably face RICO when shit hits the fan. This is not a legal advise and I am not a lawyer.

I would worry that this
Submitted by FormerSanDiegan on August 1, 2008 - 10:16am.

I would worry that this transaction is being set up primarily as a tax dodge. The Government has been aggressively targeting tax dodges over the past several years.
The purpose of the transaction appears to be primarily to either a) avoid estate taxes, or b) establish a high cost basis that eventually benefits the buyer when they sell.

I would not stick my neck out on a transaction like this. You can probably get away with transactions within 15-20% of comps, since it might be harder to prove that it was overpaid. But a 100% difference would likely stick out if there is any screening going on by any law enforcement agencies. OR even worse, it will likely get noticed on one of these housing blogs as such an outlier that would raise suspicion.

So this is interesting. Not
Submitted by flu on August 1, 2008 - 10:33am.

So this is interesting. Not that this particular example is/was applicable to me (I find writing in the "I/you" tense to be more clear than other tenses, .

But I was suspecting this is(was) one of the many loopholes that rich folks could use to skirt inheritance tax. And given that this housing bubble recently wouldn't be scrutinized if timed well, since how could one tell.... I was mainly wondering if this was something that those folks could have legally done. And If so, I wonder if people actually did this.....Hmmmmm...

More interesting
Submitted by flu on August 1, 2008 - 10:44am.

More interesting information.

http://www.foxbusiness.com/story/passing...

The interesting part is, see it seems like a lot of tax laws are there for the case of a home being passed on to an heir on the assumption there is an appreciation (IE FMV of the home at time of death is worth more than original cost of home)..(To safeguard against people selling the home lower than FMV to reap a benefit) .But I'm curious how a lot of these estate laws/income laws would work if the FMV of the home is actually less than a purchase price.

I'm not trying to seek any legal advice. It's just that I find these things pretty interesting like a puzzle, similar to that off topic 3 doors, behind 1 door prize off topic subject.

Some decent estate planning
Submitted by JordanT on August 1, 2008 - 11:21am.

Some decent estate planning could make this unnecessary. Each person can give 12K per year tax free as a gift. Anything over that, and you start getting into gift taxes. Assuming you're married and your kid is married, this ends up being 48K per year. You can give 12K to each person and your spouse can give 12K to each person. I do believe that paying far more than FMV for an item is considered a gift by the IRS.

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